Lanka should follow Ireland - Chairman, Ceylon Chamber of Commerce

Sri Lanka should follow in the footsteps of Ireland, Chairman of the Ceylon Chamber of Commerce, Deva Rodrigo delivering the keynote address at the 11th LBR - LBO CEO forum said.

He said that Sri Lanka should adopt a bipartisan approach, to settle the North East conflict, to curb crime, to eliminate - if not drastically reduce - corruption, to introduce labour reforms, education reforms and public sector reforms, and to enforce unpopular and perhaps initially painful fiscal discipline to make Sri Lanka a prosperous nation.

Rodrigo's keynote address was on the lessons Sri Lanka could learn from the economic transformation of Ireland, titled 'Could Sri Lanka replicate Celtic Tiger's economic transformation?'

Sri Lanka's per capita income in the 1960s was about US $ 60 and Korea and Taiwan were also in that same range. Indonesia and Thailand were far less.

In today's figures, Taiwan is in the US $ 20,000s. So is Korea. About three years ago Indonesia was, well over US $ 1000. Sri Lanka is just touching US $ 1000 in 2004. Thailand is over US $ 2000. Malaysia, even in 1960, has gone a little above Sri Lanka.

They are now about US $ 4500. Singapore, as you know, is about US $ 30,000 today. But even Singapore in the 1950s was below Sri Lanka's per capita income. So why did this change take place? We are just touching US $ 1000, when all these countries, which were on par with us in 1960, or below us at that time, have done so well, and surpassed Sri Lanka over the last 50 years.

In 1990 India's gross official reserves was five times that of Sri Lanka. And they were in such bad state in terms of foreign reserves; they couldn't pay for their import bills. The gold reserves of the Reserve Bank of India - the Central Bank of India - were loaded to a plane, waiting to take off to the UK if it became so necessary. Because that was the condition on which import bills were being met by the banking system.

There were two choices. Even today it's being debated in Sri Lanka. Some months ago a certain parliamentarian and certain policy makers, they debated, before the tsunami of course, before the foreign reserves increased following the tsunami, they were saying 'How can we manage, cope with the falling foreign reserves, and the depreciation of the Rupee? Should we re-introduce controls, or do we allow the Rupee to rise to whatever the level where it will settle, and thereby expect the imports to be curbed and for exports to be increased?'

There was a lot of discussion. I'm not referring to the Monetary Board, but I have seen parliamentarians, and people at that level, discussing why we should introduce controls. But let us look at what India did in 1990. When India was in a much worse situation than we were in last year, India had two choices.

One was to further control the economy; the other was to liberalise. India was already a tightly controlled economy and further control of it wouldn't have yielded any results.

The new government, led by Narasimha Rao, was convinced that the way forward, was to liberalise the economy, and it was a gamble, it was a risk worth taking. Having liberalised the economy in 1990; that was 13 years after Sri Lanka did it, India's foreign reserves, as at the end of 2004, was US $ 119 bn. And Sri Lanka's were US $ 2.1 bn.

That is India's foreign reserves were more than 50 times that of Sri Lanka's. In 1990 it was only about five times. How did it happen? Because of economic liberation - followed by other reforms. And good governance.

Any businessman who goes to India and comes to Sri Lanka says "You have far less bureaucracy, from clearing through the customs, the immigration, getting out of the airport. It is far better to come to Sri Lanka and try to do business here, registering a company, getting approvals than in India. Yet India has prospered.

If you take the last four years, I would say we have had a roller coaster ride. We appeared to do extremely well in 2003, and even up to the first and second half of 2004, in spite of the elections, in spite of the dissolution of parliament, and the drought at the end of 2003, we have recorded a 5.9 percent growth.

Having come from a negative of 1.5% in 2001, and about 4% in 2002, our annual average inflation had fallen from 9.6% in 2002 to 6.3% in 2003. If you take point-to-point figure it is only about 5% in 2003. But it rose to 7.6% in 2004.

If you take the point-to-point, it was much more than 7.6% and for 2005 what is projected is 9.5%. You may ask 'is it only 9.5%?' That is the average: because when you take the average it doesn't show as high a figure as point-to-point. Point-to-point could be 16%. The budget deficit for 2004, the current estimates are 8.5% as against the budgeted figure of 6.8%. Partly it was a shortfall in the collection of non-tax revenues. But there were other reasons.

This happened in the post 77/78 era, the government that came into power took about 2 to 3 years to take away the subsidies, the flour subsidies and the other things. When expenditure was going down the war started. And gradually military expenditure increased to 6% under that regime.

The budget deficit went up to 10% for many years, and we had fierce inflation, and the depreciation of the Rupee. So today we are in a situation where inflation is on the rise, budget deficit is about 1.5% more than expected, and unemployment which fell to 8% at the end of 2003, has gone up to 8.5% by the third quarter of 2004. Prime lending rates, that's interesting, which fell to 8.9% in 2003 increased to 10.2% by December 2004.

A very marginal, small increase. Not in line with what you would have expected with the other economic indicators. But the average deposit rate, the rated average deposit rate, has been hovering around 5.3% 2003-2004.

When the interest rates rise, it is an impediment to economic development and activity. It adds to the budget deficit further because the public debt is huge. Public debt is about 106% of GDP. Of that, half is domestic debt. Therefore 50% of GDP is domestic debt. Therefore if interests go up by 1%, you know what impact it will have on the budget deficit again. So for that reason also, I think the government is eager to keep the interests rates low.

The way to get out of it is, and I think that's what the government is trying to do, Finance Ministry, is trying to reduce the budget deficit. To reduce the budget deficit, just now the emphasis is on raising tax revenue.

There are two arguments again. One argument is, raise tax revenue because some years ago tax revenue was about 19 or 18% of GDP. It had fallen to 14%. I must admit that during the last year tax revenue, or collection, had gone up by about 1% of GDP. But the secretary to the Finance Ministry says, certainly that's not enough. It should go back to 18%. Now why did this 18% drop to 14%? One was because the export taxes, the ad valorem taxes that were there on tea, and some other commodities, were withdrawn.

I would agree with the withdrawal of export duties and taxes because if you go through the history of our coffee industry era, you will see that the British government at that time imposed a huge export duty on coffee. Coffee was imposed with this export duty and it started contracting, because it was not competitive anymore with other countries. So the removal of export duties was good.

Then how do we increase tax revenue from the present 14 to 18%?

As the business sector's responsible citizens we should agree that everybody should pay his due taxes. That does not mean that we plan our affairs to pay the maximum tax. We should study the tax laws and try to minimise our taxes.

That's perfectly fair. We should never try to arrange our things to pay more taxes, but we should pay the taxes legitimately due. We may find ways of legitimately avoiding, but not evading. And there's a large segment of the economy, what we call the black economy, which is not getting caught to the taxes.

Say VAT for instance. For every million rupees that somebody does not pay tax, you and I are sharing the burden of that.

Therefore the Rupee that was virtually static with the US $ in 2003, only a 0.1% depreciation, as good as zero, in 2003, depreciated by 7.5% last year. In this year so far - the first quarter we are finishing tomorrow - we have had over 5% appreciation.